UK Government awards £250k grant to develop blockchain foreign exchange prototype

Innovate UK works with companies to de-risk, enable, and support innovation. Incorporated by Royal Charter in February 2007, Innovate UK was originally established as the “Technology Strategy Board,” which is still the organization’s legal name.

The organization has committed over £1.8 billion to innovation, and has helped more than 7,600 organizations with projects since 2007. They estimate adding between £11.5 billion and £13.1 billion to the UK economy, creating 55,000 extra new jobs. Earlier this month, Innovate UK announced it will invest a further £561 million in UK-based disruptive businesses.

UK government grants are awarded to individuals or businesses for specific purposes or projects. The advantages of grants over loans are that recipients neither have to repay grants or pay interest on them nor lose control over their businesses. Any UK-based company can apply for funding of £25,000 to £10 million.

“To be globally competitive the UK must innovate and grow. Innovation is responsible for 50% of all productivity growth and the mission of Innovate UK is to help make this happen. We will build on our track record of success, focusing ever more closely on scaling up [small and medium businesses], equipping them to reap the benefits of the fourth industrial revolution."
— –  Dr. Ruth McKernan, Innovate UK Chief executive

Innovate UK provides three main tools for supporting high-potential small and medium businesses (SMEs);  Innovation Vouchers, Knowledge Transfer Partnerships (KTP), and a grant program called “Smart.” Innovation Vouchers worth up to £5,000 are provided to start-ups, micro businesses and SMEs, so that they can seek specialist knowledge to help them innovate, develop, and grow. KTPs help  businesses access the knowledge, technology and skills available in universities, colleges and research organizations.

Smart is a grant for R&D projects in the strategically important areas of science, engineering and technology, from which successful new products, processes, and services could emerge.

Tramonex, a London-based FinTech startup,was recently awarded a £250,000 grant, “to develop a prototype for cross currency payments using blockchain technology,”  under the ‘Smart: Development of Prototype’ category, which has a maximum funding limit of £250,000.

Founded in 2013 by ex-bankers Marc Avedissian and Amine Berraoui, Tramonex specializes in foreign exchange (FX) transfers for SMEs, and high net worth individuals. The current Tramonex platform, launched in 2015, offers trades in over 45 currencies, and customized FX solutions at wholesale rates.

According to Innovate UK’s annual report, a total of 5,508 project applications applied for Innovate UK’s grants in the financial year 2014-15 but only 1,401 were offered funding. Up to 60% of the companies Innovate UK works with are small and medium businesses (SMEs).

“Tramonex is very pleased to have been chosen by Innovate UK to develop a blockchain prototype for FX transactions.[..] With this grant, Tramonex wants to provide a platform to create a common standard, to ultimately reduce the time and cost to transact across currencies.”
— – Marc Avedissian, Tramonex co-Founder and COO

The UK Parliament House of Commons Briefing Paper states that there were 5.4 million UK businesses in 2015, and over 99% of them are SMEs. Moreover, 95% of all businesses were micro-businesses, or those with less than 10 employees, a total of 5.1 million businesses.

According to an independent report by online business currency exchange and international payments service, Money Mover, UK SME international trade is worth over £700 billion.

The report states that most SMEs use banks for sending and receiving international payments. However, “UK banks are overcharging and underserving their SME customers when it comes to international payments.” Specifically, they charge SMEs nearly £4 billion in hidden fees, or approximately £2.7 billion more than they would pay with the best independent service providers.

According to separate research by global payment and risk management solutions provider, AFEX, British companies have become more bullish on international trade with 46% expecting international trade to increase in 2015. However, 31% of SMEs in the UK rate currency risk as their primary challenge when conducting business internationally.

A separate report by Money Mover and strategic consultancy service Accourt, shows that UK banks lack transparency on both currency exchange rates and margins. Each bank generates its own FX internal rate for the day, which customers do not have access to. "In some instances the bank’s exchange rate is not even provided before confirming the payment," the report says, making it impossible for customers to know the fees before committing to trade.

Money Mover’s survey of small businesses shows that over 80% of the respondents did not know the true cost of foreign exchange through their banks while 43% would find international trading more attractive if foreign exchange fees were more transparent and easier to understand.

“SMEs are paying huge hidden fees. Whereas the bank may advertise a small fixed fee this makes up only a few percent of the total transaction cost, with up to 96% of the bank’s profit on a foreign exchange transaction being hidden within the spread.”
— – Money Mover

The Gateway to Research (GtR) website, operated by non-departmental public body the Research Councils UK (RCUK), state that SMEs with forex turnover of less than £1 million are being refused services by large banks, forcing them to use small banks who charge as much as ten percent commission on each transaction.

In a post on the Innovate UK/Tramonex project, they state that “these services are opaque about charges/costs and inefficient (often taking 1 to 5 days) due to the number of intermediaries involved.”

The Tramonex platform is designed to be fully automated and transparent, so users will know the exact commission charges. In addition, the platform is also planned to perform automated identity checks, to fulfill anti-money laundering regulation compliance.

“While forex is essential for businesses, SMEs are pushed out of the market due to the financial crisis and resulting high compliance fees. Banks now consider SMEs too risky for forex, limiting capacity for UK SMEs to trade outside the UK.”
— – Research Councils UK Gateway to Research

Tramonex will use the new grant to establish a prototype for blockchain settlement, and demonstrate it to the Financial Conduct Authority (FCA), a UK financial regulatory body that operates independently of the UK government. “As a regulated financial institution we will work closely with the FCA to ensure we approach this in the right way. We’d like to be ready before the end of the year,” Avedissian told Brave New Coin.

Avedissian explained that they’re looking to build on the Ethereum public blockchain, “primarily for its native smart contract functionality.” The company considered a number of alternatives, and built a functioning prototype on top of MultiChain. However, “the MultiChain team have no intention of building Ethereum-like smart contracts and we like the versatility that they bring to our solution,” he noted.

“We believe that the solution we are creating will have broad application, hopefully well beyond the immediate needs of Tramonex.” Avedissian explained, adding that “the idea behind us opening this up on a public blockchain is to encourage its use, growth and development.”

Once launched, Tramonex’s prototype will facilitate conversion and settlement services using blockchain ledger technology. The new solution is designed to drastically reduce the FX transaction time from current industry standards down to under one minute. It will also significantly reduce the cost of cross-currency transfers, making them more efficient, accessible, and affordable for SMEs, Tramonex stated in the press release.

“It’s only a question of time until blockchain technology goes mainstream and becomes the standardised option for cross-currency transfers.”
— –  Avedissian